Mentioned in Video:

🔮 #CathieWood just added #PLTR (Palantir stock) to ALL SIX #ARKInvest funds right after #Palantir earnings for Q2 2021. In this episode, I share why it makes sense for Palantir to be in every single @ARK Invest fund, the biggest surprise in their earnings call, and why it could be one of the best stocks to buy now.

Video Transcript:

Oh, boy. Cathie Wood just went all in on Palantir. And in this episode, I'd like to answer one simple question: should we? Here's what's going on. A few weeks ago, I shared my long term vision for Palantir, a company that makes many people excited, but few people truly understand. So that episode focused on the company, what they do for their government and enterprise clients today and what they could do for smaller businesses and individuals in the future. In this episode, I'd like to talk about Palantir, the stock, ticker symbol PLTR and whether or not it's a good investment.

Your time is valuable. So I'll give you the bottom line up front. In my opinion, Palantir is a great investment if you're willing to hold it for a long time and through a lot of volatility. Stick around to the end of the episode and you'll know exactly why I feel that way. As a bonus, I'll share the one thing from their earnings presentation that makes me super excited to hold shares of this company for a long time. Full disclosure: I'm not a financial advisor, and I now own a lot of Palantier stock. Sort of by accident.

You know, over and over again, I say we don't make mistakes. We have happy accidents.

After my previous Palantir episode, I opened a position in the company myself. Then, after their most recent earnings call, Cathie Wood added a lot more Palantir to every single ARK Invest fund. Let's talk about that first. Here's how much Pallantir stock Cathie Wood added to each fund since their most recent earnings call. $1.5 million of Palantir got put into ARKX. $14 million of Palantir were put into ARKQ, $9 million were added to ARKF, $43 million were added to ARKG, and Cathie Wood increased her existing Palantir positions in ARKW by over 25% to $127 million and by over 28% in ARKK to a whopping $630 million.

Putting it all together, ARK Invest has now $825 million in Palantir across all of their funds combined, making Palantir only the second company to be in all six funds, with the first being UiPath. UiPath is ARK Invest's 10th biggest position overall, and now Palantir is their 16th biggest position overall, jumping up seven spots from rank 23 where it was just three trading days ago. I think it's important to understand why ARK Invest has such a bullish position on Palantir. Let me add some context to our analysis of their most recent earnings call with this quick clip of Cathie Wood on CNBC's halftime report explaining why ARK Invest added so much to their position after their quarter 4 2020 earnings call earlier this year.

Let me ask you about Palantir, which we just found out you've added to. Can you tell our viewers why you added rather significantly to your stake in Palantir?

Yes, they reported yesterday and the stock was down on the report. It's interesting to listen to the CEO. He was speaking our language. He essentially said to investors, we are playing in a massive space here, and we're going to invest aggressively now in order to capitalize on the exponential changes that are taking place here. So if you are short term in your focus, you probably don't want to spend too much time investing in Palantir. That's music to our ears because we do believe more and more companies are going to start behaving in this way instead of catering to short term time horizons and in some cases shortsighted shareholders who are much more interested in profits now, dividends now, share repurchases now, then they are in a company investing aggressively for going short term profitability in order to really catch some very big waves out there.

Revenues are still 61% government. But I've learned and I think most people in the innovation space have learned over time that some of the most important innovations in our lifetimes have started in the government, especially in the defense sector and in the intelligence sector. So we think in many ways and they won't talk about how, but they're certainly garnering a lot of business, which tells us that they are seeing in the future and investing in the future in ways that companies, governments, but increasingly companies are going to need.

And so Palantir's attitude is refreshing. It's exactly how we invest. We want our companies to invest aggressively. We don't want profits now. Because we're moving into many “winner take most” markets.

So that clip will serve as the template for what we're looking for in this earnings call. Understanding the revenue mix from government versus business, looking at how concentrated the revenue is among their top clients and thinking about their future growth opportunities in downstream markets. I'll also cover their massive stock compensations and the insider selling of stocks going on inside their leadership team. Let's jump into their Q2 earnings, starting with their revenue mixed from government versus commercial businesses.

Q2 revenue grew by 49% year over year from $252 million to $376 million in Q2. Their commercial customer count grew by 32% quarter over quarter, not year over year. Quarter over quarter. That's great to see. However, their government revenue is still growing faster than their commercial revenue. Palantir's government revenue grew by 66% year over year as they signed new deals with the Army, Air Force, Coast Guard, Department of Health and Human Services and the Centers for Disease Control. By the way, their ability to help with things like vaccine production, distribution and administration, as well as driving innovation across the healthcare landscape in general is one reason I think they were included in ARKG.

My understanding is that as long as a company has lots of data to pull together and analyze, they're a potential customer for Palantir. That's why the stock got slotted into every single ARK Invest fund. Let me know in the comments below if I'm missing something here and there are specific industries that Palantir can't help with for one reason or another. With that said, commercial revenue grew by 28%, so not even half as fast as the revenue growth on the government side. I honestly don't think this is a bad thing because they've been involved with the government for over a decade longer than the commercial side of things.

What this really tells me is that they have a long way to go before they hit a wall on the government side, and we can eventually expect that same kind of growth on their commercial side as their Foundry platform continues to mature. About 62% of their revenue is currently coming from government projects and the remaining 38% is coming from the commercial side. Again, not a bad split given how much newer their commercial offerings are and how fast the company is growing overall. Instead of looking at government versus commercial revenue, we can also look at their revenue concentration, meaning their biggest 20 clients versus the rest.

The average revenue of their top 20 clients grew to $39 million. 20 times 39 million is $780. If we add up Palantir's last four quarters of revenue on HyperCharts, we get about $1.3 billion. That means about 59% of their revenue is coming from their top 20 clients. This is where I think the real risk would be, not the fact that their revenues are still largely from the government side. However, the more new deals they sign with existing clients, the more Palantir proves just how sticky they are.

When I say sticky, what I mean is how much their current clients stick with them and expand their business deals as opposed to leaving altogether. Their average revenue per top 20 customer reflects that, having increased by a whopping 36% year over year. Their average revenue across all customers also increased by 19% year over year. So overall, they're getting a lot more work per customer, not just acquiring new customers. In fact, they booked $925 million worth of work this past quarter, up a whopping 175% from the same time last year.

Just for context, their total revenue in 2020 was $1.1 billion. So they booked 84% of last year's revenue in a single quarter. No matter how you slice it, Palantir's Q2 earnings were awesome and I'm excited to see them keep up this kind of exponential growth. The two questions I got most in the comments of my previous Palantir video were about the high amounts of stock-based compensation and their leadership team selling large amounts of the stock. So I'll talk about those two next. Let's start with the stock based compensation.

Cathie Wood said that she doesn't want the companies she holds to be profitable for the sake of catering to short term shareholders. Do we agree? I started crunching some numbers and then I ran into a great article on Seeking Alpha that shows a more interesting take than I was going to show you. So I'd like to share that with you instead. The author of the article is Business Quant, and I'll link it in the description below. The way I'll add value here is by updating the numbers from this most recent quarter.

So you're getting the best of both worlds. The basic idea is that Palantir's stock-based compensation expenses are disproportionately high and that investors are avoiding the stock altogether as a result. Because the stock options and units giving us compensation increase the total share count, they're diluting existing shareholders. In fact, a few quarters ago, their stock based compensation was three times their revenue. Holy Moly. As of this latest quarter, stock-based compensation is still around 60% of their revenues for the trailing twelve months, significantly dragging down profitability, and management is not issuing any guidance on these compensations in the future.

So, first things first. In a world where people job hop a lot, stock-based compensation with long vesting periods gives employees a reason to stay in one place for a good amount of time. More than that, it literally keeps employees invested in the growth of the company because they have skin in the game. So these compensations are one way that Palantir and other high growth companies protect themselves from losing key employees and the knowledge they would leave with. Second, Business Quant did something very clever in this article.

They compared Palantir's revenue growth, and growth and compensation expenses to those of other software companies. The X-axis here is the percent revenue growth over the last two quarters, and the Y-axis is the percent growth of their stock-based compensation over that same period. Last quarter, when this analysis was done, Palantir's stockbased compensations actually fell the most while they were one of the fastest growing companies in the comparison. Let's add in Palantir's most recent data. Palantir's new point should look like this. Their revenue grew by 17% sequentially over the last two quarters, from $322 million to $376 million, and their stock-based compensation fell from $242 million to $232 million, or roughly 4%.

That's still better than the middle of this pack. They're among the fastest growing companies on this list, and their stock-based compensation growth is below the median. So when you compare Palantir to fairly similar software companies, there's nothing really to worry about here. It's par for the course. The other thing to point out here is that stock-based compensation takes a long time to vest. So even though these shares are all locked in for employees right now, the dilution will happen over the course of years. Now we have a real leg up on people who don't realize that this is a normal part of a company's growth story

as all the dots on that plot would suggest. I find that people often overreact to dilution. So when people sell their shares of Palantir for dirt cheap based on news of getting diluted, we can be mentally and financially prepared to take advantage. Now, let's talk about the insider selling. Investors seem to be worried about the leadership team selling large amounts of the stock, specifically Alex Karp, Palantir's CEO. So let me point out two things here that immediately made me stop worrying. First, Alex Karp still owns millions of shares.

He has 6.4 million shares of Class A stock and 32.5 million shares of Class B common stock. If we count up all of the shares he currently has access to, he has about 64.5 million shares valued at roughly $1.6 billion. Nobody keeps such a massive position when they don't have confidence in the future of the company. Second, there's a rule you should be aware of. It's going to save you a lot of heartache and can make you a lot of money when insider selling makes headlines.

The rule is called the 10b5-1 rule, and it allows company insiders to set up a predetermined schedule to sell company stocks in accordance with insider trading laws. The price, the amount and the sales dates must be specified in advance and determined by a formula or other metrics. Both the seller and the broker making the sales must not have any access to any material, non public information. What this means is that any insider sell that happens as a result of this 10b5-1 rule isn't controlled by the insider.

They set whatever criteria in advance, and then when it happens, it happens. If we go back to Alex Karp's insider trading data for Palantir, guess what we see. Most of his trades fall under this 10b5-1 rule. In fact, his latest trade that doesn't follow this rule is a buy on April 15. He does have a couple big sells at the end of the first quarter, but they're a drop in the bucket compared to the amount of shares he still holds today, literally a fraction of 1%.

Okay, so Cathie Wood is confident in this company. The insiders are confident in this company, earnings were great no matter how you slice them. There's one more thing that I want to talk about, and I saved the best for last. Palantir isn't just expanding down market with Foundry for builders, like I talked about in my previous episode. They're commercializing their Apollo platform. If you don't know what Apollo is, it's the platform behind their other platforms. It's the continuous integration, deployment and controlware under multiple installations of Gotham and Foundry that can send updates and patches to client systems, even if they're on classified networks or on machines that won't send data back out.

If that sounded like a bunch of jargon and mumbo jumbo to you, think about it this way. If Gotham and Foundry were a bunch of big buildings on a city block, Apollo is the foundation and piping and utility lines and roadways that would run between them. Apollo is what allows Palantir to be one of only five companies authorized for mission critical national security systems on impact level five by the US Department of Defense. The other four companies are Oracle, Microsoft, Project Hosts, and DISA, the Defense Information Systems Agency.

This is a tiny list. The Apollo platform is going to get Palantir into all sorts of businesses that usually have to develop these things for themselves, and the competition is less than a handful of companies here. Seeing them say that they're commercializing apollo is a very big deal and will open a lot of doors to Palantir in the future, especially if they can scale it down to just the essentials for smaller companies that want just the core features. Again, think about how big the world of privileged and sensitive data is beyond government systems: health records, financial records, secret projects inside big tech companies, machine learning training data from sensors and robots, security data like biometric information and so on.

If you put all these together, there's a huge market of networks with sensitive information on them that the Apollo platform can serve. When it comes to Palantir, there's no shortage of crazy and awesome stuff to talk about. The more I dig, the more I love this company. If you're interested in learning more about what their products do, the services that they provide, or just my crazy moonshot for how they'll scale to a trillion dollar valuation, check out my deep dive episode on Palantir. I'll link it in the top right hand corner of your screen right now and in the description below as well.

I hope this episode helped you understand more about Palantir the stock, including their latest earnings report, as well as concerns about their stock-based compensations and insiders selling shares, as well as Cathie Wood's crazy bullish position. If it did, consider investing in the like button and subscribing to the channel with all notifications turned on. That way, you'll be the first to know when I drop my next episode on Palantir, where I focus on another thing that really surprised me. Palantir is invested in twelve SPACs. Twelve. I was going to talk about them in this video, but there's twelve of them.

One of them is a robotic exoskeleton company that gives the wearer superhuman strength. Another is doing some pretty cool stuff in the genomic space. There's a lot to talk about, and I'm excited to share it all with you. Until next time. This is Ticker Symbol: You. My name is Alex, reminding you that the best investment you can make is in you.

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Alex Divinsky

💰 Investing in our future through disruptive innovation, ☕ lover of coffee, 📺 host of Ticker Symbol: YOU on YouTube

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